The following was reported in the July 8, 2010 edition of the Wall Street Journal:
The International Monetary Fund advised the Obama administration to consider raising taxes and reducing Social Security benefits as ways to contain the U.S. budget deficit and public debt.
In its annual review of the U.S. economy, the IMF forecast that the economy will grow 3.3% this year, and then not top 3% annual growth over the following five years,. As a result, the IMF projections of the deficit and debt top White House forecasts.
The administration has pledged to halve the deficit by 2013 and to stabilize the public debt at 70% of gross domestic product by 2015. However, the IMF projects that current policies would push the debt level up to 95% of GDP by 2020 and above 135% by 2030.
The IMF urged the administration to cut the budget deficit by about 8% of GDP by 2015, which is nearly three percentage points more than the administration plans.
Spending cuts aren't sufficient, the IMF said, and it suggested a number of politically difficult ways of reducing debt, including:
● eliminating the popular deduction for interest on mortgages,
● raising energy taxes,
● reducing Social Security benefits or
● imposing a national consumption tax.
Yet in another article the Wall Street Journal reported that Treasury Secretary Tim Geithner offered a glimmer of hope to investors who are facing huge tax increases on capital gains and dividends next January.
In a CNBC interview late Wednesday, Geithner said the Obama administration still hopes to hold the top tax rate on both capital gains and dividends to 20% next year – the level the White House has been proposing since taking office.
Of course, a 20% rate would represent a big increase over the current 15%. But it’s a lot better than the 39.6% top rate for dividends that congressional Democrats have signaled they were planning next year for higher earners.
Congress currently is planning to extend most of the Bush breaks – particularly those for middle-income earners – for some period, perhaps only a year or two. But budget rules that lawmakers passed earlier this year anticipated the Bush-era breaks for higher income earners would expire immediately. That would mean the tax on dividends for higher earners would return to the pre-Bush ordinary income rate. That rate is expected to rise to 39.6% next year.
However, there are growing worries among Democrats that their plans to allow taxes to rise substantially for higher earners will create drag on the recovery, and particularly on financial markets. That appears to be opening the possibility that some of their severest tax increases will be put off, at least for a bit longer.
“There’s…real concern about what would happen in the markets” if dividend rates went as high as 39.6%,” Stretch said. Given the fragile state of the economy, lawmakers “are not in the mood to experiment with the markets.”
So take your pick-higher taxes? Lower taxes? Maybe both!